One gets to hear about futures margins very often while trading futures and commodities. The concept of margins in futures trading is defined as amount of money a trader agrees to put up to control a futures contract. In other words, the future margins is an agreement which sates that holder of a position in futures contracts has to deposit a particular amount covering the credit risk of the counterparty which may be a broker also.
The futures exchanges set the rates of futures margins and later on margins some brokerages is added which results in an extra premium to the exchange minimum rate. This is done in order to lower their risk exposure. The amount of margins in futures trading is a set amount which is calculated on the basis of the risk factor.
There are various types of future margins one come across while in futures trading markets. These are briefly defined below defined. Please have a look as it will help in better understanding of the concept of future margins.
Current Liquidating Futures Margin: It is defined as the value of a securities position in case the position was liquidated now. It can also be put in this way that in case a holder of the contracts is having short position, the amount of money required to buy back. The money can be raised by selling it in case he is in long position.
Variation Futures Margin: The variation margin also called as the maintenance futures margin is a daily offsetting of profits and losses. It is not collateral. These types of futures margins are marked to market daily, that is why the current price is compared to the previous day's price. The profit or loss on the day of a position is then paid to or debited from the holder by the futures exchange. This is possible, because the exchange is the central counterparty to all contracts, and the number of long contracts equals the number of short contracts. There are various other exchange traded derivatives, like options on futures contracts, which are marked in the same way.
Premium Futures Margin: In the premium futures margins the party which has sold the option has the obligation to deliver the underlying of the option if it is exercised. In order to ensure that the party or the trader is able to meet his obligation, he has to deposit collateral.
Additional Futures Margin: the purpose of these types of future margins is to cover a potential fall in the value of the position on the following trading day. The additional margins are calculated taking into account the potential loss in a worst case scenario.